The STIC reported that Canada’s research and development performance is lagging behind the world’s leading economies, continuing a disturbing decade-long decline.

The STIC report is the third produced since 2008, but the first to sound an unmistakable alarm on worrying trends that could have dire long-term consequences for the Canadian economy. Simply put, based on the latest data Canada cannot be regarded as a serious player when it comes to innovation.

The most glaring shortcoming comes from the lack of business investment in research and development activities. Canada ranks 25th out of 41 economies, with Canadian businesses failing to keep pace with competitors around the world. Investment in information and communication technologies, which are viewed as an engine of innovation, fared particularly poorly.

Not only is Canada’s business research and development record weak, but the Canadian venture capital performance, which plays a key role in launching new businesses, is similarly grim. The report finds that Canadian venture capital investment (measured as a percentage of gross domestic product) ranked 15th out of 27 countries.

The lone bright spot comes from higher education, where expenditures on research and development have increased significantly over the past 15 years, resulting in an impressive publication record. Canada may only account for 0.5 per cent of the global population, yet its scientists and researchers were responsible for 4.4 per cent of the world’s natural sciences and engineering publications in 2010. Despite punching above its weight in publications, Canadian commercialization of academic research remains a concern, with most universities generating minimal licensing revenues.

So what can be done about Canada’s middling innovation record?

The government has expressed disappointment with the reluctance of business to invest in research and development, but its policies have thus far failed to generate much change. Ottawa has invested heavily in supporting business research and development, but the bulk of that support has come through indirect mechanisms such as tax credits.

Many other countries invest more heavily in direct funding, including loans and guarantees, competitive grants, consulting services and innovation vouchers. Canada ranks among the lowest of all economies examined by the STIC for these direct funding models. The Canadian government has been reluctant to adopt direct funding measures, but the data suggests that its current strategy is not working and should be revisited.

The Canadian venture capital shortcoming is a long-standing frustration as emerging businesses have often been forced to look to foreign investors for support. The data in the STIC report is striking with private investors accounting for 81 per cent of venture capital funding in the U.S., but domestic private investors are responsible for only 25 per cent in Canada.

Canadian businesses rely more heavily on government venture capital as it comprises 12 per cent of total funding. With the government already putting its own money (or taxpayer dollars) into venture capital, the solution likely does not lie in cutting a larger taxpayer cheque but rather in identifying any remaining investment barriers and potential tools to encourage greater entrepreneurial risk-taking.

The educational piece of the puzzle may require a more dramatic shift.

The emphasis on licensing has not sparked much commercialization and the track record suggests that it is unlikely to do so. Rather than focusing on locking down publicly funded research through licensing programs, the government should consider embracing open models of innovation. The STIC report acknowledges that open models foster collaboration, reduce costs and increase the speed of knowledge development, all areas in desperate need of improvement.

Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law. He can be reached online at www.michaelgeist.ca .

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